Vanguard opened an important 3-month voting campaign today with the filing of its final proxy statement with the U.S. Securities and Exchange Commission. Vanguard is asking shareholders to elect the trustees of its funds and to approve several policy changes across its U.S.-domiciled fund lineup. . . .

Proposal 7—
A shareholder proposal to institute transparent procedures to avoid holding investments in companies that, in management’s judgement, substantially contribute to genocide or crimes against humanity, the most egregious violations of human rights.

While I certainly don't condone genocide, this seems to imply that index funds might not actually hold all of the stocks in the index anymore. So all index funds may now become slightly social-index tilted?

Interesting. Although it looks from the proxy statement that the trustees aren't for it.

Vanguard opened an important 3-month voting campaign today with the filing of its final proxy statement with the U.S. Securities and Exchange Commission. Vanguard is asking shareholders to elect the trustees of its funds and to approve several policy changes across its U.S.-domiciled fund lineup. . . .

Proposal 7—
A shareholder proposal to institute transparent procedures to avoid holding investments in companies that, in management’s judgement, substantially contribute to genocide or crimes against humanity, the most egregious violations of human rights.

While I certainly don't condone genocide, this seems to imply that index funds might not actually hold all of the stocks in the index anymore. So all index funds may now become slightly social-index tilted?

Interesting. Although it looks from the proxy statement that the trustees aren't for it.

Wouldn't this already be priced in in the form of potential consumer backlash and regulatory actions? This seems like a backdoor way to punish companies for "crimes against humanity" that amount to nothing more than differences of opinion on religious/moral beliefs.

How is management judgment even compatible with index funds? Why not a specific UN or US State Department list?

And finally, how exactly did this get proposed? If it's Vanguard, I find it disturbing that they want to inject politics into their investment decisions.

An interesting feature of the Vanguard proxy booklet is that it discloses the holding in VG funds of the 12 trustees/trustee nominees. In broad terms, of course: much the most common holding is "over $100,000". My attention was caught by the funds in which NO trustee has any holdings. Here is a very partial list, chosen because I thought the absence of trustee investment is interesting:

Proposal 7—
A shareholder proposal to institute transparent procedures to avoid holding investments in companies that, in management’s judgement, substantially contribute to genocide or crimes against humanity, the most egregious violations of human rights.

While I certainly don't condone genocide, this seems to imply that index funds might not actually hold all of the stocks in the index anymore. So all index funds may now become slightly social-index tilted?

Interesting. Although it looks from the proxy statement that the trustees aren't for it.

Capital boycotts either work, or they don't. If they work, it's by making capital more expensive for the boycotted companies to purchase. That means that investors who are willing to fund these operations will get outsized returns, and so the social-index tilt will necessarily result in below-average returns. And if capital boycotts don't work, why bother with them?

And finally, how exactly did this get proposed? If it's Vanguard, I find it disturbing that they want to inject politics into their investment decisions.

From the look of it, any shareholder can propose pretty much anything. I wrote to the secretary requesting details on the proponents (the letter says they will provide names and shareholdings). I'm interested to see if this is a drive-by; that is, someone who bought a few shares solely for the purpose of proposing this idea.

Proposal 7—
A shareholder proposal to institute transparent procedures to avoid holding investments in companies that, in management’s judgement, substantially contribute to genocide or crimes against humanity, the most egregious violations of human rights.

While I certainly don't condone genocide, this seems to imply that index funds might not actually hold all of the stocks in the index anymore. So all index funds may now become slightly social-index tilted?

Interesting. Although it looks from the proxy statement that the trustees aren't for it.

The proponents of SRI filters in index funds are a very loud minority of shareholders. If the people who do not want to mix politics into their investing do not use their proxy voting rights, this proposal might actually get passed. And once the line is crossed and a few companies are excluded, it is easy to exclude more companies until the index funds may no longer able to track their benchmark indexes.

Proposal 7—
A shareholder proposal to institute transparent procedures to avoid holding investments in companies that, in management’s judgement, substantially contribute to genocide or crimes against humanity, the most egregious violations of human rights.

While I certainly don't condone genocide, this seems to imply that index funds might not actually hold all of the stocks in the index anymore. So all index funds may now become slightly social-index tilted?

Interesting. Although it looks from the proxy statement that the trustees aren't for it.

The proponents of SRI filters in index funds are a very loud minority of shareholders. If the people who do not want to mix politics into their investing do not use their proxy voting rights, this proposal might actually get passed. And once the line is crossed and a few companies are excluded, it is easy to exclude more companies until the index funds may no longer able to track their benchmark indexes.

That is my concern; it could extend to tobacco companies, defense contractors, oil companies, etc. The proponents are starting with genocide (however tentative the connection may be) because it sounds good, and it gets their foot in the door for the actual targets of this proposal.

Vanguard and many other companies already offer funds that meet the criteria that the proponents are after.

I also think it is funny that the proponents say "Only a handful of Vanguard’s U.S. funds would be affected" and but the list of impacted funds are:

Proposal 7—
A shareholder proposal to institute transparent procedures to avoid holding investments in companies that, in management’s judgement, substantially contribute to genocide or crimes against humanity, the most egregious violations of human rights.

While I certainly don't condone genocide, this seems to imply that index funds might not actually hold all of the stocks in the index anymore. So all index funds may now become slightly social-index tilted?

Interesting. Although it looks from the proxy statement that the trustees aren't for it.

Capital boycotts either work, or they don't. If they work, it's by making capital more expensive for the boycotted companies to purchase. That means that investors who are willing to fund these operations will get outsized returns, and so the social-index tilt will necessarily result in below-average returns. And if capital boycotts don't work, why bother with them?

I underlined the passage I'm commenting on. Unless I miss something, this is true IF the operation works & does so to a degree larger than the increase cost of capital. That is, the increase cost of capital may cause those investors who did participate a lowered return if indeed the operation failed or couldn't overcome the increase.

Proposal 7—
A shareholder proposal to institute transparent procedures to avoid holding investments in companies that, in management’s judgement, substantially contribute to genocide or crimes against humanity, the most egregious violations of human rights.

While I certainly don't condone genocide, this seems to imply that index funds might not actually hold all of the stocks in the index anymore. So all index funds may now become slightly social-index tilted?

Interesting. Although it looks from the proxy statement that the trustees aren't for it.

Capital boycotts either work, or they don't. If they work, it's by making capital more expensive for the boycotted companies to purchase. That means that investors who are willing to fund these operations will get outsized returns, and so the social-index tilt will necessarily result in below-average returns. And if capital boycotts don't work, why bother with them?

I underlined the passage I'm commenting on. Unless I miss something, this is true IF the operation works & does so to a degree larger than the increase cost of capital. That is, the increase cost of capital may cause those investors who did participate a lowered return if indeed the operation failed or couldn't overcome the increase.

Am I missing something?

It would have to be a huge drop in investor demand. If the stock sells at a price that gives a 10% vs an 8% return, it doesn't mean the company is paying out 2% extra, it just means it raised a little less in that round. The real problem is that if it absolutely has to raise capital by selling stock and the cost of equity gap is very large, existing shareholders risk getting diluted. Similarly, while an increase in interest rates selling debt do affect shareholders, the impact wouldn't be that big unless it was (a) over leveraged so that increased interest expense would be financially unsustainable or (b) really having a trouble driving demand for its debt.

There's enough cold hearted hedge funds out there that the above scenarios aren't happening unless the company is so evil that investors think it won't be able to stay in business. In that case, it wouldn't be the social indexes hurting the company.

Proposal 7—
A shareholder proposal to institute transparent procedures to avoid holding investments in companies that, in management’s judgement, substantially contribute to genocide or crimes against humanity, the most egregious violations of human rights.

While I certainly don't condone genocide, this seems to imply that index funds might not actually hold all of the stocks in the index anymore. So all index funds may now become slightly social-index tilted?

Interesting. Although it looks from the proxy statement that the trustees aren't for it.

The proponents of SRI filters in index funds are a very loud minority of shareholders. If the people who do not want to mix politics into their investing do not use their proxy voting rights, this proposal might actually get passed. And once the line is crossed and a few companies are excluded, it is easy to exclude more companies until the index funds may no longer able to track their benchmark indexes.

Time to vote, then. If I buy an index, I want to buy the index, not somebody's idea of a "socially responsible" list of companies.

It would have to be a huge drop in investor demand. If the stock sells at a price that gives a 10% vs an 8% return, it doesn't mean the company is paying out 2% extra, it just means it raised a little less in that round. The real problem is that if it absolutely has to raise capital by selling stock and the cost of equity gap is very large, existing shareholders risk getting diluted. Similarly, while an increase in interest rates selling debt do affect shareholders, the impact wouldn't be that big unless it was (a) over leveraged so that increased interest expense would be financially unsustainable or (b) really having a trouble driving demand for its debt.

There's enough cold hearted hedge funds out there that the above scenarios aren't happening unless the company is so evil that investors think it won't be able to stay in business. In that case, it wouldn't be the social indexes hurting the company.

I think we're in agreement. I guess my point was that it wasn't right to say they "WOULD" get out-sized returns. Makes it sound as if the higher capital cost overrode the normal business risks. I doubt that is what was meant. I underlined some of your comments that were more detailed to get that there were no guarantees

But I am a bit dismayed opposing genocide is "political" or something to do with being "politically correct" rather than basic human rights.

Does a student taking a photograph with the sitting Vice President of the United States constitute direct violence and oppression against marginalized groups?
Did the previous POTUS support genocide by having breakfast with the Sudanese president who was accused of genocide?

PLEASE don't answer that in terms of red vs. blue or other politics. The point is that when labels get thrown around as easily as they are in today's polarizing politics, things that sound nice like "opposing genocide" and "basic human rights" are inherently political.

And going back to my previous point, if a company was really involved in something really bad, wouldn't the mass boycotts, government restrictions, etc already drive their price down enough to either knock them out of the index or make it so they're only 0.000001% of assets? And for active funds, wouldn't that lead to them being excluded on investment fundamentals?

But I am a bit dismayed opposing genocide is "political" or something to do with being "politically correct" rather than basic human rights.

I don't think anyone is "for" genocidal activities, but the framing of the question is dishonest and manipulative if you ask shareholders "do you want to fund companies' engagements in genocidal activities?" First of all, to which degree are you funding a company if you buy some of its stock on the secondary market? And also, do we know that divestment is an effective means of effecting social change?

If company A does business in or with country B who is in a conflict (violent or not) with group C, when is A involved in genocide? Who gets to decide when A crosses the "genocidal" line? I'm ok if I get to make that decision. If someone else makes it, well, that might be different.

The socially correct international investing proposal is clearly labeled as a shareholder initiated -- not by Vanguard management.

The REIT proposal is very important as it fundamentally changes the REIT Index Fund from REITs to Real Estate: Vanguard is proposing to add real estate development and management companies to this fund. I voted no.

Proposal 7—
A shareholder proposal to institute transparent procedures to avoid holding investments in companies that, in management’s judgement, substantially contribute to genocide or crimes against humanity, the most egregious violations of human rights.

How would not holding Genocide Corp stock help anyone? It might indirectly depress the stock price of GC a bit but I'm pretty sure other, greedier investors will make up the difference if GC is not priced correctly.

Wouldn't the wiser course be to hold GC at cap like any other stock, and then use every opportunity to stop its bad behavior with shareholder votes?

I am eligible to vote, but I feel extremely uninformed about all of this.

I am a passive investor and not really in the 'know'. I haven't read through the whole pdf yet, but so far I have the feeling I still won't be able to make an educated vote. What do you guys recommend I do in this situation? Should I just suck it up and read the document 10 times until I understand it? Research each of the Trustees to see if I should or shouldn't vote for them?

Shareholders are also being asked to vote on several fund proposals that will harmonize policies across Vanguard's U.S.-based funds. If the proposals are approved, the funds will have more operational flexibility, helping them run more efficiently and effectively.

This is a misleading info from Vanguard, some proposal like the one in question definitely don't help fund run more efficiently.

I am eligible to vote, but I feel extremely uninformed about all of this.

I am a passive investor and not really in the 'know'. I haven't read through the whole pdf yet, but so far I have the feeling I still won't be able to make an educated vote. What do you guys recommend I do in this situation?

I think a lot of us are in the same position. I guess most people just vote as current management recommends, if they have faith in them. There's also an "abstain" option for each vote.

I am eligible to vote, but I feel extremely uninformed about all of this.

I am a passive investor and not really in the 'know'. I haven't read through the whole pdf yet, but so far I have the feeling I still won't be able to make an educated vote. What do you guys recommend I do in this situation? Should I just suck it up and read the document 10 times until I understand it? Research each of the Trustees to see if I should or shouldn't vote for them?

I voted against everything, including the trustees. For something/someone to get my vote, it needs to be clear with no effort why I should vote that way. If it's a good proposal, it should still get a solid majority from the people who are informed. If it's a bad proposal, I didn't vote for it blindly. In the unlikely event this strategy knocks down a good proposal, that's on whoever didn't do enough to educate the voters.

I don't abstain because that opens the door to a vocal minority grabbing control and doing something against the interests of the silent majority.

The REIT proposal is very important as it fundamentally changes the REIT Index Fund from REITs to Real Estate: Vanguard is proposing to add real estate development and management companies to this fund. I voted no.

It would be interesting to see what the impact is:

The MSCI US REIT Index includes only equity REITs. The MSCI US Investable Market Real Estate 25/50 Index has approximately 97% of its component securities as equity REITs, which includes an increase in the allocation to specialized REITs, and currently a 3% allocation to real estate management and development companies. If shareholders approve the investment objective change for the Funds, then the corresponding change to each Fund’s benchmark index will provide investors of each Fund with exposure to the securities of approximately 26 additional real estate issuers.

The changes to the top 10 holdings, relative to the current stated holdings of Vanguard REIT, are including:
- American Tower Corp, which owns broadcast and wireless comm towers
- Crown Castle, which also owns broadcast and wireless comm towers
- Weyerhauser, which owns timberland

You could make arguments both ways. Owning specialized REITs seems to add quite a bit of diversification to the fund. I'm certain Jeremy Grantham will be excited about the timberland I don't have a dog in this fight but I would vote yes, diversification is the only free lunch as they say.

Prop 7 - (first I am not in favor of it, looks to suspciously fishy to me that someone is trying to manipulate the company.. very suspicously)

It may be with hindsight, but if Prop 7 leads to the index funds failing to track the index significantly, lawsuits could come to bear.. and people would leave the fund anyway simply because by its own simple metric.. it failed to track the index. (causing that would also be a way to manipulate the company by "excuse the pun".. proxy)

It just has all the ear marks of a trial balloon as seeing just how many people who own the index are watching their money.

Prop 7 - (first I am not in favor of it, looks to suspciously fishy to me that someone is trying to manipulate the company.. very suspicously)

It may be with hindsight, but if Prop 7 leads to the index funds failing to track the index significantly, lawsuits could come to bear.. and people would leave the fund anyway simply because by its own simple metric.. it failed to track the index. (causing that would also be a way to manipulate the company by "excuse the pun".. proxy)

It just has all the ear marks of a trial balloon as seeing just how many people who own the index are watching their money.

Agreed, it's obviously a way to force our index funds to not track the index - and once you exclude one company, you can start proposing excluding other industries, countries, or governments someone doesn't approve of.

I'm a little worried about approving "managers of managers". On its surface it looks like the insertion of another layer of [expensive] management. In this case, we don't know how many new managers total, do we? Hundreds? Thousands?

Are my fears unfounded? Is this discussed at length somewhere? I've just started reading the 85 page proxy document...

The REIT proposal is very important as it fundamentally changes the REIT Index Fund from REITs to Real Estate: Vanguard is proposing to add real estate development and management companies to this fund. I voted no.

Before I would vote no on this question, I would want to know how how constrained the fund is. One of the the reasons given for the proposal is to "Provide additional investment capacity."

The change will also provide additional investment capacity for the funds, which helps mitigate the impact of limits on how much of any one REIT an investor can own.

Intuitively, investment capacity is likely a real issue with the fund. Think about how few publicly traded REITs there are in the US — less than 200, if I recall a recent search correctly. Vanguard's REIT index fund alone has over $63B in assets, spread over a mere 155 or so stocks. Then think about how many REIT funds there are — both passive and active. At least a couple of others rival the size of Vanguard's fund. The amount of overlap in all the REIT funds out there must be astonishing.

If investment capacity really is becoming a problem, why wouldn't the proposed change be positive, overall?

A lot of great discussion here on Proposal 7. However, for an investing new guy like me, can anyone offer guidance on making heads or tails of the other proposals? I'm not sure I follow all the jargon. Thanks!

You could make arguments both ways. Owning specialized REITs seems to add quite a bit of diversification to the fund. I'm certain Jeremy Grantham will be excited about the timberland I don't have a dog in this fight but I would vote yes, diversification is the only free lunch as they say.

I'll be voting “yes” on the REIT proposal as well. The changes Vanguard is proposing are prompted by recent changes in the Global Industry Classification Standards used by S&P and MSCI, and the concentration rules for regulated investment companies. So the changes seem more technical than substantive.

The existing Vanguard REIT Index Fund will change its name, its objective and its benchmark from US REITs to US Real Estate companies, which is comprised 97% of REITs (including specialized REITs). The 25/50 concentration rules will be observed - no more than 25% in any one company and no more than 50% in aggregate of companies with 5% positions. In the end, I don’t see anything objectionable about having a few non-REIT real estate companies in the Fund.

I voted yes on Proposition 7 for the couple of actively-managed funds that I hold, and no for the index funds. As others have noted, if you start omitting companies from an index fund for such reasons, the fund no longer is tracking the index.

There is almost zero chance of Prop 7 passing, and that is fine with me. I voted yes as a statement to the management that I care about such issues. If a large enough minority of shareholders do, that might have some influence on things.

Can someone please provide an example of a listed U.S. corporation that contributes to genocide or crimes against humanity?

The non-profit group that originated Vanguard’s divestment proposal, Investors Against Genocide, has focused their efforts on four oil companies that do business in Sudan and are apparently crucial to sustaining the Khartoum government — which has been charged with genocide in the Dafur region of Sudan. None of the four are U.S. oil companies.

Two of these oil companies — PetroChina (China’s largest oil producer) and SinoPec (a major Chinese oil and gas company) — are apparently small constituents in a handful of Vanguard international stocks funds.

PS. This is not a personal endorsement (or non-endorsement) of Vanguard’s divestment proposal, just background information.

Two of these oil companies — PetroChina (China’s largest oil producer) and SinoPec (a major Chinese oil and gas company) — are apparently small constituents in a handful of Vanguard international stocks funds.

FWIW, as of 4/30/17 (the last semiannual report date), PetroChina is 0.1% of VTIAX (Vanguard Total International), and SinoPec is "0.0%".
Looking at VWO (Vanguard Emerging Market), PetroChina is 0.3% and SinoPec is 0.1%.

An interesting feature of the Vanguard proxy booklet is that it discloses the holding in VG funds of the 12 trustees/trustee nominees. In broad terms, of course: much the most common holding is "over $100,000". My attention was caught by the funds in which NO trustee has any holdings. Here is a very partial list, chosen because I thought the absence of trustee investment is interesting:

What exactly are crimes against humanity? For example, are countries that turn a blind eye to companies that export products that endanger citizens of another country committing crimes against humanity? Is China trying to stop Chinese companies from producing fentanyl which is imported to the USA by drug dealers to mix with heroin? Fentanyl mixed with heroin is a dangerous substance that is a contributing factor in the opium epidemic sweeping the USA. Death is a consequence of this dangerous combination. Is this an indirect form of genocide?

Since China is doing nothing to control the export of fentanyl, should U.S. investors cease investing in companies that manufacture and import products made in China? Should they stop investing in General Motors because some Buicks are made in China?

A lot of great discussion here on Proposal 7. However, for an investing new guy like me, can anyone offer guidance on making heads or tails of the other proposals? I'm not sure I follow all the jargon. Thanks!

In the proxy information, Vanguard's fund board of trustees offers their recommendation on how to vote for each proposal. The first 6 proposals were set forth by Vanguard. They recommend voting for the first 6 proposals. Proposal 7 was made by shareholders. The funds board of trustees recommends voting against proposal 7.